Form and Substance in the Law of Obligations

Andrew Robertson, James Goudkamp, Andrew Robertson, James Goudkamp

• Publisher: Hart Publishing
• Year: 2019
• ISBN:
  9781509929467
• Edition: 1
• Topic: Jura
• Subtopic: Rechtstheorie & -praxis

This volume explores the relationship between form and substance in the law of obligations. It builds on the rich tradition of legal thought that deploys the concepts of form and substance to inform our understanding of the common law. The essays in this collection offer multiple conceptions of form and substance and cover an array of private law subjects, scholarly approaches and jurisdictions. The collection makes it clear that the interplay between form and substance is a key element of the dynamism that characterises this area of the law.

1

Between Form and Substance

ANDREW ROBERTSON AND JAMES GOUDKAMP

This collection of essays is drawn from the Ninth Biennial Conference on the Law of Obligations, which was focused on the theme of this book. The theme was inspired by PS Atiyah and Robert Summers’ influential comparative study Form and Substance in Anglo-American Law, which was published a little over 30 years ago.¹ Atiyah and Summers explored the relationship between formal reasoning (the application of rules without reference either to the justifications that underlie the rules being applied, or to other potentially relevant considerations of justice or welfare) and substantive reasoning (direct reference to considerations of justice, purpose, welfare or convenience). Duncan Kennedy was also concerned with form and substance in this sense in his landmark article ‘Form and Substance in Private Law Adjudication’, which preceded Atiyah and Summers’ study.² Kennedy argued that a lawmaker’s choice of form correlates with a substantive preference, with individualism corresponding with a preference for rules and altruism with a preference for standards. Form and substance are also distinguished in various other ways in the law of obligations. A form and substance dichotomy that is more familiar to private lawyers in the common law world is the distinction between what might broadly be described as appearance on the one hand and underlying truth on the other. In this vein, distinctions are commonly drawn between the form of a legal instrument, transaction or relationship, and its intended or actual legal effect. A related distinction is sometimes drawn between the form of a legal or equitable doctrine and its substantive effect. This book explores the insights provided by various manifestations of the form and substance dichotomy.³

The primary purpose of Atiyah and Summers’ analysis of form and substance was comparative. They claimed that a profound difference – perhaps the most profound difference – between the English legal system and those of the US was that the English approach to law was highly formal, while the American was more focused on and driven by matters of substance, in each case excessively so. Atiyah and Summers helpfully captured their thesis in the idea of contrasting ‘visions’ of law, with the English vision of law being essentially that of ‘a system of rules’, while the American vision of law was of ‘an outward expression of the community’s sense of right or justice.’⁴

The differences between English and American approaches to law, Atiyah and Summers showed, have deep roots. The English understanding of law has long been dominated by Austinian positivism, while the American long influenced by notions of natural law and of law as an instrument of social and economic policy.⁵ Atiyah and Summers suggested that those different conceptions of law and the respective levels of formality in legal reasoning both influenced, and were influenced by, wide ranging differences in legal education, legal scholarship, the conception of legal rules, the doctrine of precedent, the capacity of the courts to develop and reform the common law, the legislative process, law reform processes, the drafting of statutes, statutory interpretation, various aspects of civil and criminal procedure including the role of juries, access to justice, the court structure, the appointment of judges and composition of the judiciary, and the structure of the legal profession.⁶ Atiyah and Summers compared each of those aspects of the English and American legal systems and others in detail.

The focus of this collection is on the interplay between form and substance in the law of obligations, including legal and equitable doctrines, judicial reasoning, the drafting of statutes, statutory interpretation, and private law theory.

I.False Appearance and Inner Truth

The form and substance dichotomy that is most familiar to private lawyers is the distinction between what Andrew Burrows describes in Chapter 2 as ‘false appearance and inner truth’.⁷ In this context, the form and substance dichotomy is invoked to justify looking beyond a chosen legal form to the true nature of a transaction or relationship in order to ensure that it has the consequences, either as between the parties or in the public interest, that it ought to have. Pey-Woan Lee notes in Chapter 4 that transactions may be ‘recharacterised’ in order to prevent the avoidance of the legal incidents of a particular category of transaction or relationship at common law, or to prevent the avoidance of the consequences of a statutory regime.⁸ In this context substance is preferred to form where the form of a transaction or relationship is seen as artificial and the substance is considered to reflect the underlying reality of the situation. Whether transactions and relationships should be recharacterised is a familiar question in relation to employment, leases, trusts, mortgages and charges.

Looking more broadly at the category of false appearance and inner truth, substance is preferred to form in a number of different situations, and those situations can be classified in different ways. In Chapter 3, Birke Häcker distinguishes between the category of cases in which content prevails over name (such as employee/independent contractor and lease/licence), the broader category of cases in which legal substance prevails over factual appearance (including sham transactions and cases in which the equitable remedy of rectification is granted), and cases in which economic substance prevails over legal form.⁹ Häcker’s economic substance/legal form category is exemplified by the understanding of contractual penalties adopted by the High Court of Australia in Andrews v Australia and New Zealand Banking Group Limited,¹⁰ in which a contractual provision can constitute a penalty – even if it is not triggered by a breach of contract – if ‘as a matter of substance’ it is collateral to a primary stipulation, on the failure of which it imposes an additional detriment to the benefit of the other party.¹¹

Within the broad category of form and substance in the sense of appearance and underlying truth, a more basic distinction can be drawn between the form and substance of legal transactions and legal relationships on the one hand and the form and substance of legal doctrines and judicial reasoning on the other. As we see in this volume, the notion of form and substance as appearance and underlying truth is not distinct from the notion of form and substance in the sense of rules and reasons. On the contrary, the two conceptions are heavily intertwined. The essential reason for this is that whether a transaction, relationship or legal doctrine should be understood or treated differently from its surface appearance is not simply a factual question of its inner truth or reality, but is an issue that requires consideration of normative questions of justice between the parties and the social and economic consequences of different characterisations.

A.Recharacterising and Adjusting Transactions and Relationships

The legal and equitable processes of looking beyond the name, form or appearance of a legal transaction or relationship encompass wholesale recharacterisations as well as more limited adjustments such as those made through the doctrine of rectification. A foundational question in this context is what constitutes the ‘substance’ that is to be preferred to the legal form. As Ben McFarlane notes in Chapter 9, the relevant equitable maxim is sometimes expressed as ‘equity looks to the substance rather than the form’ and sometimes as ‘equity looks to the intent rather than the form’.¹² Clearly party intent is the determining criterion in many instances. In such instances the courts are generally not concerned with the transactional form or form of words intended by the parties but with the rights and obligations they intended to create. In this respect, as Pey-Woan Lee observes in Chapter 4, the courts tend to apply formal criteria in order to determine the substance of a transaction. Whether and when a transaction should be recharacterised, however, raises questions of substance in the sense of considerations of justice and community welfare.¹³ That is because recharacterisation raises normative questions about matters such as the implications of the avoidance – or inappropriate invocation – of the common law incidents of particular categories of relationship, and the appropriateness of constraining party autonomy.¹⁴ Lee argues in Chapter 4 that in some instances these questions of substance need to be more openly acknowledged and explicitly addressed in recharacterisation cases. In her analysis of this topic Lee illustrates the deep and important connection between the two conceptions of form and substance.

Another strong example of the connection and interplay between the two kinds of form and substance (appearance/reality and rules/reasons) is provided by the decision of the English Court of Appeal in Shell UK Ltd v Total UK Ltd, which is subjected to sustained critical analysis in three chapters in this volume.¹⁵ The court in that case held that the beneficial owner of property could recover damages for economic loss that is consequent upon physical damage to that property caused by the defendant’s negligence, provided the trustee is joined in the proceedings. In doing so, the court departed from the general rule that only the legal owner or a person with a possessory interest in property can recover damages for loss caused by the destruction of or damage to that property. The court further eroded the general rule against liability for pure economic loss in negligence. It also departed from the foundational notion that a beneficiary under a trust does not have a right to the trust asset itself, but only rights against the trustee (which may affect third parties who deal with the trustee).¹⁶ The court was influenced by a concern that legal rules must not stand in the way of ‘practical justice’, noting that it would be ‘legalistic’ to deny a right to recovery to the ‘real owner’ of the property, and that it ‘should not be legally relevant’ that the ‘“real” owner’ had chosen to vest legal title in another company. The court concluded that it ‘it would be a triumph of form over substance to deny a remedy to the beneficial owner of property when the legal owner is a bare trustee for that beneficial owner’.¹⁷

The court’s concern to do ‘practical justice’ in Shell v Total led to a development which was incompatible with the concept of the trust as conventionally understood. Substance in the shape of ‘real ownership’ (underlying truth) and ‘practical justice’ (reasons) prevailed over recognised legal forms (rules and concepts), and what was taken to be a ‘legalistic’ (formalistic) understanding of the law. If one accepts the force of the widespread criticism of the decision in Shell v Total,¹⁸ then it provides a good example of what Atiyah and Summers called ‘substantivistic’ reasoning: a favouring of substance (in the sense of both underlying reality and a loose sense of justice) over form (in the sense of both appearance and rules) which may be considered excessive when judged by the standards of the jurisdiction in which it was made.¹⁹ The analysis of Shell v Total by Häcker, McFarlane and Swadling in this volume suggests that the decision illustrates the dangers of too great a willingness to dismiss a concern with form and the application of settled pr...